Volcker to step down as Obama adviser

Former Fed chief created ‘Volcker Rule’ to limit big bank speculation

By

RonaldD. Orol

WASHINGTON (MarketWatch) — Former Federal Reserve Chairman Paul Volcker, the inspiration for the still-undefined “Volcker Rule,” is expected to step down as a key economic adviser to President Barack Obama, according a source familiar with the matter.

As head of Obama’s Economic Recovery Advisory Board, Volcker designed a controversial bank reform measure, dubbed the “Volcker Rule,” which is intended to limit big insured banks’ speculative proprietary derivatives and stock investments.

The measure was included as part of the sweeping post-crisis Dodd-Frank Act. It is strongly opposed by the financial sector, in part, because it also forces banks to sell majority interests in hedge funds and private equity units.

The Federal Reserve has yet to define specifically how long banks have to divest significant holdings in hedge funds and private equity units. It also has yet to write rules detailing what kind of proprietary trading would be permitted by big financial institutions and what trading won’t be permitted.

Volcker came in to head the President’s Economic Recovery Advisory Board, created during the financial crisis to bring outside experts to the White House that could inform Obama about how best to revive the struggling economy. With Volcker’s exit, the board will continue to exist but it will have a slightly different focus, a source familiar with the matter said.

The Volcker rule has some high profile opponents on Capitol Hill. House Financial Services Committee Chairman Spencer Bachus (R., Ala) has sought to limit the impact of the provision in the past.

Bachus, in July, unsuccessfully sought to amend the bank reform legislation with a provision that would have prohibited the Volcker Rule’s implementation unless other countries adopted similar measures. Bachus said he is worried the provision could drive investmetn from U.S. banks to other institutions in other countries.

However, Volcker argues that the measure is critical to restoring the economy and ensuring another financial crisis doesn’t happen again.

Volcker is a worrier

Recently, Volcker raised concerns about the implementation of a key provision of the bank reform statute designed to limit the collateral damage from a mega-bank failure.

The former central banker, speaking to reporters from an event at the American Enterprise Institute, was talking about an element of Dodd-Frank knows as “resolution authority” that seeks to dismantle a failing big bank that’s deemed to be so big or so interconnected that if it collapsed suddenly it would threaten the economy’s stability.

“I worry about everything, I’m a worrier. Everyone talks about resolution authority which is really a key. Nobody knows quite how it’s going to work. Nobody will know until it is tested, but there are several problems,” Volcker said in December. “We want to get greater international consistency. It’s not up to the U.S. alone.”

In the event of an impending implosion, the mechanism would use U.S. taxpayer dollars to make partial payments to “healthy” creditors and counterparties of the failing firm so that they wouldn’t go down with it.

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